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Retail Buying

Notes $600 for the item, thus making $120. The retailer then sells the item at the suggested list price of
$1,000, thus making $400 in gross margin to cover expenses and a profit.
Trade discounts are legal where they correctly reflect the costs of the intermediaries’ service.
Sometimes, large retailers want to buy directly form the manufacturer and pay only $432,
instead of $600. If this action is anti-competitive and enables the large retailer to undercut the
competition, it would be illegal.

11.3.2 Quantity Discount

A quantity discount is a price reduction offered as an inducement to purchase large quantities of
merchandise. Three types of quantity discounts are available:
1. Noncumulative quantity discount: a discount based on a single purchase.
2. Cumulative quantity discount: a discount based on total amount purchased over a period
of time.
3. Free merchandise: a discount whereby merchandise is offered in lieu of price concessions.
Non cumulative quantity discounts can be legally justified by the manufacturer if costs are
reduced because of the quantity involved or if the manufacturer is meeting a competitor’s price
in good faith. Cumulative discounts are more difficult to justify, because many small orders
may be involved, thereby reducing the manufacturer’s savings. For an example of how a quantity
discount works, consider the following schedule:

If a retailer, which had already purchased 500 units, wanted another 800 units, it would have to
pay list price if the vendor uses a noncumulative policy. However, the retailer would receive a
5 percent discount on all purchases if the vendor uses a cumulative pricing policy.
Quantity discounts might not always be in the seller’s best interest and should always be viewed
by the buyer as an invitation for further negotiations. Consider the following price schedule
published by IBM for a computer.

Let’s say that as a buyer for a retail chain, you want 18 of these computers and your cost is
$104,310 (18  $5,795). But 20 would only cost $101,980 (20  $5,099). What do you do?
You actually have four choices:
1. Tell IBM to ship 20 computers at $5,099, and you keep the extra 2.
2. Tell IBM to ship you 18 computers at $5,099 and have IBM keep the other 2.

3. Order 20 but tell IBM to ship you only 18 and to credit you for two computers at $5,099
each.
4. Negotiate a purchase price.

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